As the tastes, trends and topics dominating contemporary society wax and wane, insurance and risk management evolve in turn.
Few places is this more true than in the Excess & Surplus (E&S) insurance market, where brokers are challenged to manage some of the most pressing issues of the day while responding to sporadically tighter market conditions thanks to multi-billion-dollar catastrophe losses, the subsequent rate hardening, and underwriting changes at some of the world’s largest carriers and insurance market — all while their own industry continues to consolidate.
As such, the surplus lines market saw more than $45 billion in premiums written in 2018, according to Wisconsin insurance trial attorney Gary Wickert.
Covering difficult risks
Here are just some of the contemporary issues impacting the E&S insurance market:
As the legal cannabis industry continues to expand across the United States as well as into some pockets internationally, it largely falls to specialty carriers to safeguard what continues to be a high-risk business.
As technology use and adoption grows across all industries, and hackers become ever more clever about how to co-opt that technology, specialty insurers must step up to help bandage together umbrella policies.
News and current events have caused businesses in every sector to become more sensitive to inclusivity and workplace behavior. Meanwhile, the demand for Abuse and Molestation insurance is rising, particularly in states where voters have extinguished litigation statutes of limitations.
And most especially in the United States, where mass public shootings are now an epidemic, and lawmakers grapple with whether the country needs better mental health services, stronger gun laws, both or neither, it’s specialty insurers and brokers who must negotiate the brave new world of Crisis Insurance, where any public space that attracts crowds could pose complex risks and the potential for catastrophic losses.
“This is a very exciting time in the E&S market,” says Jude DiBattista, senior vice president and head of the E&S Division for QBE North America. “There are lots of opportunities for growth.”
DiBattista also says that 2019’s strong economy has translated into fresh exposures in previously quiet industries and locations, which allows specialty insurance brokers and firms to diversify their portfolios.
“Traditionally, we saw exposures in major states such as New York, Illinois and California,” he says. “We now see exposures in other states, like Washington and Utah. Just this year, we have seen substantial growth in Minnesota and Arizona as well.”
Niche firming effect
With new opportunities come fresh challenges. Notably for the specialty insurance market: “The rate environment is hardening, and this is something that we haven’t seen in a long time,” DiBattista says. “We are seeing double-digit rate increases across the property & casualty lines, as well as many carriers pulling back on the capacity they are deploying, particularly in tougher classes of business.”
Dave Obenauer, CEO of Birmingham-based CRC Group, believes a few pivotal things have happened in recent years to shift the rates, coverage terms, capacity and premium pricing of the E&S market. Among them: Major players such as AIG and Lloyd’s announced “significant changes in underwriting and pricing appetite.”
“Since they’re the two largest markets in specialty and E&S,” Obenauer says, “everyone else has followed suit. So you have other carriers increasing rates and decreasing capacity.”
One factor in particular is pushing these market changes: Catastrophic weather events.
According to research conducted by Munich Re, Property Claim Services and Verisk Analytics, the United States experienced 108 catastrophic events in 2018 alone.
(These firms define a catastrophe as an event that causes $25 million or more in insured property losses and affects a significant number of property & casualty policyholders and insurers.) These events were responsible for 355 fatalities, an estimated $52.3 billion in insured losses, and an estimated $81.9 billion in overall losses.
“The market is responding to severe loss development on the tougher classes of business,” says Tim Turner, chairman and CEO of Chicago’s Ryan Specialty Group, LLC.
“While clearly not across the board, the current market conditions are more of a ‘niche firming phenomenon.’ Classes of business that are loss leaders for standard markets and reinsurers are leading the firming trend.”
Turner views such market challenges as an opportunity.
“The most talented and skilled brokers and underwriters find a way to shine when the environment is more challenging,” he says. “The very best brokers and underwriters rise to the top in difficult conditions.”
Rates on the rise
Which classes of specialty insurance are seeing the most change in 2019?
Large construction projects, fleet-based transportation businesses, cannabis, any industry with wildfire exposures, Directors and Officers liability insurance, and New York City construction. “The [New York Labor Law] continues to contribute to ‘the beyond comprehension’ loss experience, with unimaginable latency in claim activity,” Turner says.
In short, carriers are now seriously scrutinizing their specialty insurance lines, and that is making the E&S broker’s job tougher. Industry leaders report that it can now take much longer to fill out a client’s insurance package than it once did.
“This is the first time in several years where capacity is tightening, resulting in more work to get deals done,” says Davis Moore, CEO of Worldwide Facilities LLC. Nearly all surplus lines brokers feel the pain.
“We’re having to work much harder on our accounts to get them the coverage they need,” concurs Obenauer. “In the past, we may have been able to get one carrier to provide a $5 million to $6 million limit. Now it takes three or four carriers.”
“Carriers are shortening their limits considerably,” says Joel Cavaness, president of Risk Placement Services, Inc., based in Rolling Meadows, Ill., as well as the current president of WSIA. “It used to only take a few carriers to sell out a tower. Today, it’s more like a jigsaw puzzle.”
Capacity is widely available, he adds, but pricing is all over the place.
Data and specialization
Industry leaders contacted for this story are in relative agreement about what it takes for a specialty market broker or firm to compete: It takes high-quality data, industry-specific insights, and long-standing client relationships.
“We all have a responsibility to position our business for long-term profitability in a way that stands out from our competitors. Innovation is one key to differentiation,” says DiBattista. “For instance, with the use of data and analytics, we are better monitoring our portfolio metrics, as well as learning more about the buying habits of our customers.”
Industry expertise also is a key differentiator. That means “knowing our customers best (along with) their particular needs,” DiBattista says. Firms must be small enough to be nimble but well-resourced enough to “provide excellent customer service with quick turnaround times on problematic issues.”
On the upside, it’s not hard for E&S leaders to convince up-and-coming insurance professionals that their business is ripe for the type of industry innovation, specialization, ongoing skill development, career longevity and financial rewards that appeal to today’s top talent.
“It is a dynamic and great career opportunity,” says Moore. “It’s dynamic because we see the more difficult and challenging risks, and no deal is similar.”
Tim Turner with RT Specialty adds that E&S insurance poses a great opportunity for anyone “who wants to work hard, learn a lot about so many interesting industries, and build lifelong relationships with brokers and underwriters.”
It also is worth noting that when industry leaders speak about innovation in the specialty insurance market, they’re not necessarily referring to the InsurTech trend, which is more impactful in the personal lines space. There, new carriers are offering digital policy delivery and e-commerce-type products that suit the service-on-demand tastes of today’s mainstream consumers. E&S insurance, on the other hand, is so highly specialized that automated solutions are not an ideal fit.
“It is a complicated business,” concludes Cavaness. “And navigating it may not be as simple as one may think.”